Accountability: Why You Should Separate Asset Management from Property Management

Accountability in a real estate organization extends
well-beyond the relationship between sponsor and investor or lender. Everyone
has an obligation to deliver results for themselves and a series of
stakeholders. Further, a great long-term investment requires many inputs to
maximize returns for everyone involved. Therefore, a clear, objective
responsibility chain is essential to success in real estate investing.

Accountability Defined

Accountability is simply the assignment of responsibility
for the success of a defined objective. Responsibility relies on communication
and alignment to ensure all stakeholders know and understand expectations and
risks. Clarity of purpose is more important here than looking for a warm body
to place credit or blame.

Organizational Accountability

Corporate governance is the formal structure that controls
and directs an organization. Principles and procedures dictate the rights,
roles, and responsibilities of each stakeholder. A collection of standard
operating procedures and policy manuals codify these structures. However, even
with all the formal documentation, organizational culture still drives most
daily activity.

Real estate organizations are responsible for executing
toward a clearly
defined business plan in each deal. Internal and external
stakeholders, including financial partners, employees, guests, and the
community have a tremendous influence on that plan.

Significant external risks, including general economic
conditions, have the potential to dramatically alter the deal’s success.
Therefore, a thoughtful corporate governance plan combined with an equally
thoughtful business plan addresses a variety of risks and potential mitigation on
a platform and deal level, respectively.

Leaders and managers can only control so much, thus it is
wise to establish formal structures to spread the responsibility when possible.

Individual Accountability

Many organizations hold integrity and personal
responsibility as cornerstone values. This follows from the principle that optimal
machine performance arises from each part working at its greatest potential.

Each stakeholder in an organization and deal has a
responsibility to deliver a prescribed result. Job descriptions and periodic
reviews keep each person on track to achieving these goals. Still, many
organizations suffer from accountability creep, where a single result is
attributable to too many people.

Small organizations are particularly susceptible because each
person “wears many hats.” Consequently, a strong set of guiding principles
paired with automatic enforcement mechanisms make it easy to settle any
ambiguity.

Building Blocks

Every organization incorporates accountability and
responsibility into its DNA to some degree. The strength and application vary
between companies and even within execution teams. However, accountability
foundations are universal and driven by human nature and social norms.

Accountability Principles

Mission, vision, transparency, and integrity are
foundational principles that empower accountability. These four abstract
concepts are essential to unify a team.

Mission and vision form the “why.” They are the concrete
representation of the reason we do what we do by translating the dream into
words and actions. Mission is the unifying message that draws teams together,
and the vision keeps them moving in the same direction.

Transparency drives communication. Teams thrive on shared
information and clear objectives. The greatest modern leaders believe that
secrecy kills organizations. Information has a gravitational pull, and overt secrecy
creates a vacuum, which allows rumors and misinformation to seep into an
organization.

Responsibility relies on each stakeholder’s knowledge of
what is important and when. Open communication is essential for satisfying this
need.

Finally, integrity is the engine of responsibility. Personalintegrity aligns the individual with their responsibility.
Empowered with a clear mission and abundant information, each member of the
team can move forward effectively. The team knows that its contribution is
important, and they are confident that other aspects of the investment receive
similar attention by others in the organization.

Processintegrity keeps the team connected
toward achieving a common mission. Each person on the team is responsible for
maintaining the machine that is driving them toward the stated objectives. A
system with automatic stabilizers ensures that everyone can continue moving in
a unified direction.

Business Plan

Every great real estate investment starts with a simple
concept. It may be scrawled on the back of an envelope or quickly calculated in
an Excel sheet. Still, the concept arises from painstaking search and learning,
over time, about what works.

A business plan that formalizes these investment objectives
is the foundation of accountability in each deal.

Every investment starts with a hypothesis. “If I do this,
then I will get that.” This statement’s structure provides “this” as your
expected action and “that” as your desired outcome. Such a hypothesis outlines
the mission and vision for your investment.

A good business plan, when shared throughout the
organization, is a communication tool for aligning the team. Deal sponsors can
only control what is within their sphere of influence. A transparent statement
of these objectives and the freedom to execute creatively empowers everyone on
the team to exert their influence where it matters.

Planning is critical to success, but you rarely follow the
plan to the letter. Its value is in laying out the manageable details of the
objectives and actions expected to drive a desired result.

For example, your business plan may prescribe a new revenue
segmentation to reach the target Net RevPAR. However, historical information
and an incomplete knowledge of the market motivates this prescription. It is
inherently flawed for that reason.

That said, a clear, unifying objective forms the foundation
on which to build the super structure of assigned responsibility.

Responsible Parties

People – living, breathing human beings – are the conduit
for achievement. Great business plans and organizational philosophy contribute
plenty to setting a productive mindset, but they DO nothing. Even the
organizational zeitgeist has very little to do with a project’s success.

Organizational accountability relies on clearly defined
rights, roles, and responsibilities. A framework, like the RACI Model, where
RACI stands for Responsible, Accountable, Consulted, and Informed is best for
defining these duties.

Break your business plan into annual, quarterly, monthly,
and weekly goals. Then, map to daily tasks or objectives to achieve them. This
is where accountability comes into play.

The RACI Model assigns people within the organization to
each goal and task according the following methodology:

Responsible – Owns the task

Accountable – Approves the Responsible party’s
work

Consulted – Contributes information or work to
the task

Informed – Receives status updates, but is not
consulted

For example, the asset manager would be accountable for
completion of a construction project, but the general contractor is
responsible. Architects, engineers, and others may be consulted. And the CEO
would be informed of its progress.

Each workflow has sub-workflows that influence and
contribute to the other. As you can see in the example above, a general
contractor may be responsible for the entire construction project, but
subcontractors are responsible for component parts to which she is ultimately
accountable.

Hotel Stakeholders

A hotel investment sponsor is responsible for many tasks and
accountable to a variety of stakeholders. Each stakeholder has a variety of
concerns that combine to influence their overall opinion of your efforts.

Peak
by Chip Conley, founder of Joie de Vivre, is the manifesto for
optimizing the hotel experience for each of these stakeholders. He explains
with fine detail how the Maslow Hierarchy of Needs
affects each person that touches your investment. One must meet her most basic
needs before she can move up to the pyramid to achieve self-actualization.

Guests

Hotel guests are paying and non-paying customers that use
your rooms, public spaces, and grounds. A clean and safe environment is their
most basic need, and the foundation for building a remarkable experience.
However, the success of your investment goes beyond providing a safe
environment.

Hoteliers regularly overlook customer acquisition cost with their
focus on “heads in beds.” Online travel agencies (OTAs) and brand marketing
provide the easiest methods to fill your hotel, but they come at tremendous
cost. Direct bookings are the most cost effective, but they comprise a small
share of total revenue.

Guests that move up Maslow’s pyramid, where your hotel meets
social and esteem needs, are more likely to recommend to their friends and
colleagues. They become raving fans when unremarkable expectations result in a
memorable stay.

Exceptional guest experience is the foundation of hotel
efficiency. After you have them hooked, make it clear that a direct booking is
more beneficial to the hotel than booking through the OTAs or brand call
center.

Employees

Employees are the most important stakeholder in any
organization. They are the people that execute on a well-communicated vision
and maximize returns from interactions with other stakeholders.

The spirit of hospitality is essential to work in the hotel
business in any capacity. This goes beyond the front desk positions. Everyone
from the maintenance crew to the financial analyst to the CEO must believe in
the fundamental purpose of providing remarkable guest experiences. That’s a
tall order.

People management is the property manager’s primary role.
Everything else is noise. Great property managers look for potential and put
talent on a pedestal.

Traditional, industrial human capital models that perceive
talent as interchangeable is long gone. Customers like to do business with
people that appreciate them and promote their self-confidence. People that
already feel the same for themselves are the only ones that can deliver this
level of attention. Therefore, employers must strive to rapidly move employees
to the top of the Maslow pyramid.

Financial Partners

Every lender and investor has a different set of financial
and non-financial objectives. A good, safe risk-adjusted return is only one
aspect that influences an investment decision. Real estate investments,
especially in hospitality, come with community impact and a variety of risks that
weigh heavily in that decision.

Too many real estate investment sponsors perceive the power
balance unreasonably weighted toward financial partners. However, the most
successful sponsors understand that there is a shared need. The financiers need
sponsors to source, underwrite, and execute on deals as much as the dealmakers
need financial support.

That said, the minute you take money from an investor or
lender, you become accountable to them for returning that money with interest.
This is a healthy dynamic that provides additional pressure to perform.

Success builds upon itself. As you outperform for one
investor, your stock improves to take on others and make them compete on terms.
Rock solid operations and talent management empower this virtuous cycle.

Community

Neighbors, government officials, students, and so many
others have a greater impact on the long-term success of your investment than
most dealmakers give them credit. Community is the fabric from which talent
emerges and gets woven back into.

As a business owner, you are as much accountable to the
community as it is to you.

Hotels are responsible for lodging visitors, hiring
residents, and keeping up spaces that contribute to the integrity of the built
environment. The investment sponsor is accountable to the community for these
and many more things.

Community actors are responsible for creating the
environment for a hotel to thrive. Demand
is born of the hard work and creativity of all the leaders and their
followers within the community. The community is accountable to its local
businesses to ensure a vibrant, growing economy.

Management’s Role

An effective hotel investment operation separates asset
management from property management to clearly define the accountability
structure. Each are responsible for a broad range of tasks that factor into the
investment’s success. Similarly, each is accountable to the other throughout
the investment lifecycle to efficiently move from one major project to the
next.

A healthy tension between property and asset management
produces the greatest results because it drives each party to do better and
become the best version of itself.

Asset Manager

Asset managers are accountable to the deal sponsor and,
ultimately, the financial partners by way of their responsibility for executing
the business plan. While this may include financing decisions, the daily
routine centers around coordinating all the pieces that go into operation and
maintenance of the hotel.

The asset manager must also actively identify and mitigate
risks that would materially impair the performance of the hotel. These risks
could arise internally or externally, and in many cases, they are a blessing in
disguise that forces a beneficial adjustment to the business plan.

Many vertically-integrated investment companies initially attempt
to combine the asset management function into their operations division, but it
quickly becomes clear that separation of the two is essential due to the scope
of responsibilities and the need for an objective third party overseeing the
property manager.

An astute asset manager understands the operations enough to
effectively coordinate any decisions that may have an impact on guest
experience. However, they do not get involved in the daily operations.

Property Manager

The property manager is accountable to the asset manager for
the daily operations of the hotel. Their responsibilities include managing
talent, procurement, customer acquisition, general maintenance, and many other
operational activities.

As discussed, property operations is a people business.
Guests expect an experience that meets or exceeds their expectations. The
manager can only control what is within her power to influence, and so much of
the guest experience evolves from expectations set outside that sphere.

Exceptional property managers have a strong back-office and
robust systems and processes that support effective operations. Still, this is
just a threshold requirement in this hypercompetitive business. The best
property managers create a culture of accountability, creativity, and integrity
to push every person to her optimal self.

Two-Way Accountability

The relationship between asset and property managers is the
most important of all interactions in your hotel investment. It may be even
more important than the relationship with your guests.

Asset managers must provide a physical product that the
property manager can sell effectively. Similarly, the property manager works to
optimize every aspect of revenue generation and expense management to maximize
profitability.

On its face, this seems like a simple concept. Nevertheless,
many investors get this balance wrong, which results in lost profits and
reduced asset value.

Accountability is as much a part of your culture as your
formalized systems. The way employees talk about your operations and interact
with each other has a material impact on the quality of the guest experience
and profitability of the investment.

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